* Net profit A$920 mln vs market expectations around A$980 mln
* Subdued demand weighs on growth, company offers gloomy outlook
* Shares drop to two-month low (Writes through adding analyst quote, fresh management comment; updates shares)
By Tom Westbrook
SYDNEY, Feb 20 (Reuters) - Australia’s biggest supermarket chain Woolworths Group Ltd warned of a prolonged slump in consumer sentiment as it posted slowing sales and a lower-than-expected first-half profit on Wednesday, sending its shares down sharply.
Together with falling profit at rival Coles Group Ltd , the result hints at a broader malaise in the national economy, as the sharpest property downturn in a generation sends a shiver through spending and has the central bank mulling cuts to interest rates.
“It’s a poor result and its outlook statements are very similar to Coles in that they’re fairly bearish,” said Evan Lucas, chief market strategist at fund manager InvestSmart.
Woolworths said subdued spending rippled through its checkouts, pushing liquor earnings lower as customers swapped imported champagne for cheaper sparkling wine while dragging on supermarket sales growth and squeezing profit margins.
Net profit for continuing operations rose about 2 percent to A$920 million ($660 million) for the six months to Dec. 30, below market expectations for about A$980 million.
A combination of falling house prices and rising mortgage rates and fuel costs was making customers feel less wealthy and weighing on their spending, Chief Executive Brad Banducci said on an earnings call. “We saw material trading down from champagne to sparkling wine, for example ... which flowed through the result.”
The company said it expects that environment to persist for the foreseeable future.
Woolworths shares fell as much as 6.4 percent to a two-month low, while the broader market edged 0.1 percent lower.
That was despite the company promising to return up to A$1.7 billion to shareholders after completing the sale of its petrol business to Britain’s EG Group for A$1.73 billion.
The Woolworths result came a day after Coles, Australia’s second-biggest grocery chain, posted a deeper-than-expected profit drop and said costs were rising faster than sales.
Woolworths said liquor earnings dropped 6.4 percent and its half-year comparable sales growth of 2.3 percent lagged Coles’ 3 percent - quite a gap in a cut-throat industry where growth is hard to come by and expensive.
The company also said cool weather in Australia’s east hurt ice cream and water sales, contributing to a slowdown in the pace of quarterly sales growth, which was also hurt by a move to charge customers for plastic bags.
Woolworths declared a final dividend of 45 Australian cents, up from 43 Australian cents a year earlier.
($1 = 1.3957 Australian dollars)
Reporting by Tom Westbrook; Additional reporting by Aditya Soni in BENGALURU; Editing Stephen Coates and Christopher Cushing